[Marxism] Surprising U.S. economy

John Enyang x03002f at math.nagoya-u.ac.jp
Fri Oct 7 15:56:02 MDT 2005


"The process that is actually at work can, therefore, be described as
follows: Financial mobility and its implications have created deflationary
policies almost everywhere in the world except in the U.S., which benefits
from the fact that it is perceived as the world leader and holds the
world's reserve currency. This, in turn, suppresses investment and growth,
and causes investible surpluses to be directed towards the U.S., where
they are used by both public and private sectors to fuel a debt-driven
boom. Financial integration, consequent upon deregulation, has greatly
facilitated the transfer of such savings from poor to rich countries.
Paradoxically, the U.S. economy then emerges as the only engine of growth
and all other countries are obsessed with ensuring increases in net
exports to the U.S. as the means for sustaining their own growth."


Surprising U.S. economy

JAYATI GHOSH

Despite a high level of current account deficit and external
vulnerability, the U.S. economy seems to go from strength to strength.
What exactly is going on?

"CURIOUSER and curiouser" is the economic story from the United States.
The largest economy of the world, and the undisputed boss of the
international economy, is now also by most accounts the most externally
vulnerable. Its current account deficit exceeds 6.3 per cent of gross
domestic product (GDP), and has been growing despite a real depreciation
of the U.S. dollar; the country now borrows around $2.2 billion a day to
meet its yawning external deficit; the external public debt amounts to
more than one-fourth of GDP; foreigners now hold more than half of
government securities and have bought more than 68 per cent of those
traded in the past half year.

In any other country, alarm bells would have gone off years ago, and the
economy itself would probably have been engulfed in a major financial
crisis. Yet, the U.S. economy seems to go from strength to strength
despite these absolutely crazy indicators, and both the U.S. government
and the U.S. public merrily continue to spend their way through the rest
of the world's savings without any apparent problem. What exactly is going
on?

TO begin with, a few facts. The U.S. economy has been the basic engine of
growth for the world economy for several decades now, although the extent
to which it has been able to fulfil that role successfully has varied over
time. In the Bill Clinton years, the external deficit was created by
private sector deficits, as the prolonged stockmarket boom created wealth
effects that spurred private consumption and reduced saving, even as the
federal Budget moved into a surplus. The regime of George Bush II marked a
shift back into large government deficits, caused by largesse to the rich
in the form of massive tax cuts, as well as greater military spending on
Iraq and elsewhere.

So now both public and private sectors in the U.S. are in deficit.
Incredibly, the only positive input to domestic savings in the U.S. comes
from the private corporate sector, which has recently been saving more
than it invests. The household sector now has a negative savings rate,
amounting to -0.6 per cent of private disposable income. (Incidentally,
this is the lowest rate ever recorded even in the U.S.) As a result, even
though interest rates are historically very low, more than 13 per cent of
disposable income is being used to service household debt.

Because of the low interest and mortgage rates, U.S. households have
fuelled economic growth by embarking on a debt-driven consumption spree,
which includes buying houses. But the increase in house prices, in turn,
is one of the primary causes for the increased consumption, as it has
contributed, even more than increased share prices, to making people feel
better off and willing to consume more.

Obviously, such a situation is unsustainable, even for an economy that has
benefited from holding the world's reserve currency. The U.S. cannot
expect the supply of foreign savings to continue to flow indefinitely. In
any case, as in any other economy, the shift in domestic incentives away
from tradable to non-tradable activities will eventually create problems
for the U.S.

Despite this, remarkable as it may seem, the worries about this situation
all seem to be expressed outside the U.S. Within the U.S., policymakers
are all incredibly upbeat about the situation and do not see any major
threats to economic stability in the future. A few months ago, remarks by
Ben Bernanke, one of the Governors of the Federal Reserve (the U.S.'
central bank) were widely quoted to argue that the problem was not of
unsustainable deficits in the U.S., but of a "savings glut" in the rest of
the world, whereby the rest of the world ended up sending their capital
into the U.S. as the most desirable destination.

A more recent version of this argument, and one which is potentially even
more complacent, has now been expressed by Alan Greenspan, the Chairman of
the Federal Reserve System and an acknowledged guru of the financial
markets. After several months of denial in which he described the real
estate boom as little more than "froth" on the system, Greenspan finally
admitted in a speech on September 26 that the U.S. deficit is
unsustainable and even mentioned the grave risks to the U.S. economy from
falling house prices and reduced consumption once the housing bubble
bursts.

However, the very next day, he made another speech (at the National
Association for Business Economics Annual Meeting, Chicago) in which he
painted a much rosier picture, essentially describing the capital inflows
into the U.S. as indicators of the economy's essential strength and
flexibility. First, he emphasised that a collapse of the housing bubble
would not necessarily be a disaster as most households could absorb the
loss in asset value. "Despite the rapid growth of mortgage debt, only a
small fraction of households across the country have loan-to-value ratios
greater than 90 per cent. Thus, the vast majority of homeowners have a
sizable equity cushion with which to absorb a potential decline in house
prices."

More significantly, he argued that the U.S. economy is inherently stronger
and more attractive because of its flexibility, which he felt was the
result of decades of deregulation, allowing private agents more freedom to
operate, as well as new information technologies. According to Greenspan,
this deregulation, especially in the financial, telecommunication,
transport and energy sectors, led to enhanced competition and was "a
significant spur to productivity growth and elevated standards of living".
To outside observers, of course, such an assessment is almost laughable.
But at another level it is almost reassuring, as it tells us that it is
not only our own policymakers who are capable of such self-deception. The
debate on productivity gains in the U.S. rages on, but only the foolhardy
would claim that there have been significant gains in the U.S. that are
greater than in other economies.

As for standards of living, official U.S. data indicate that the real
income of the typical household has fallen continuously for the last five
years, despite the fact that three of those years were "high growth"
periods. Real annual earnings have fallen for both men and women in the
past two years, even though hours worked have increased, indicating that
real wages per hour have declined quite sharply (Economic Policy
Institute, based on U.S. Census Bureau data).

Probably, however, Greenspan would take these indicators as further
evidence of the very "flexibility" of the U.S. economy which he extols.
However, his perception of the U.S. financial system as "a far more
flexible, efficient, and hence resilient financial system than the one
that existed just a quarter-century ago" surely is one that would cause
eyebrows to rise even among diehard free marketeers. The scams and
scandals that have rocked Wall Street since the turn of the century, and
which exposed so much of the previous 1990s bubble as being created by the
wilful deception by speculators, surely should generate greater caution.

Some of Greenspan's arguments in this regard are disingenuous, to say the
least. For example, he cites as proof of his assertion: "After the
bursting of the stockmarket bubble in 2000, unlike previous periods
following large financial shocks, no major financial institution
defaulted, and the economy held up far better than many had anticipated."
He neglects to mention that this was because of large-scale and often
secret bailouts of financial institutions on the verge of collapse, such
as the apparently massive (and still undisclosed) Federal Reserve Board
intervention to save the hedge fund Long Term Capital Management, which
was on the verge of default in 2001.

Nevertheless, Greenspan then uses this argument of greater flexibility and
efficiency to suggest that this lies behind the peculiar combination of
low interest, high consumption, high deficit growth that currently
characterises the U.S. economy. "Success at stabilisation carries its own
risks. Monetary policy - in fact, all economic policy - to the extent that
it is successful over a prolonged period, will reduce economic variability
and, hence, perceived credit risk and interest rate term premiums."

The mechanism explaining both growth and imbalance that Greenspan is
suggesting has been fleshed out by other monetary policy authorities, such
as Roger Ferguson, the Vice-Chairman of the Federal Reserve Board.
Essentially, the hero (not the villain) of the piece in this formulation
is said to be productivity growth.

It is claimed that a surge in labour productivity growth in the U.S. had
several important consequences. To begin with, it boosted perceived rates
of return on U.S. investments, thereby generating capital inflows that
raised the value of the dollar. These higher rates of return also led to a
rise in domestic investment. Finally, expectations of higher returns
boosted equity prices, household wealth and perceived long-run income, and
so consumption rose and saving rates declined. All of these factors then
helped to widen the current account deficit.

Add to this the slump in demand in the rest of the world - supposedly
because their economies are not efficient and flexible and their
productivity growth has not been so rapid - and it is possible to make the
case that the U.S. is running such large deficits simply because it is
currently the only attractive destination for capital, and financial
markets are responding to this.

THE problem with this argument, of course, is that several of the basic
premises are wrong. The difficulties with assuming dramatic increases in
productivity growth per se in the U.S. have already been noted. Labour
productivity has been increasing practically everywhere else, and in many
countries (including in the Eurozone and much of the developing world) at
a faster rate than in the U.S. This essentially reflects changes in
technology rather than the superiority of any particular institutional
set-up. And all other indicators suggest that the U.S. is entering a phase
of relative long-term decline rather than enhanced economic power.

Second, the rising asset prices in the U.S. bear all the hallmarks of a
speculative bubble rather than a real economic shift, and in any case have
been aided by government policies such as tax breaks for housing finance.
It is commonplace during a bubble for those in it to feel it will go on
for ever - the danger is when policymakers start thinking the same way as
well.

But the most substantial difficulty with the argument put forward by
Greenspan and others relates to the causes of the capital inflow into the
U.S. Despite all the talk of "savings glut", in fact savings rates across
the world have not increased. Rather, investment rates have come down -
most significantly in many "emerging markets" - and this has created the
shift towards investment in U.S. markets even by countries whose own need
for investment is still all too apparent.

The international domination of finance, which has resulted from national
policies of financial deregulation and created the possibility of large
possibly destabilising movements of speculative capital, has played an
important role in determining this. At one level, increasingly all
developing country governments guard against the possibility of damaging
capital flight by building up substantial foreign exchange reserves even
when these may involve large fiscal losses.

But the fears generated by financial market behaviour have a more telling
consequence, of imposing deflationary fiscal and monetary policies upon
governments. Across developing countries, public sector savings have
emerged as the most important marginal contributor to higher savings rates
where they have been in evidence. In the majority of developing countries,
where savings rates have not increased, the increase in net lending abroad
has been generated by lower investment rates, driven by compression of
public investment.

The process that is actually at work can, therefore, be described as
follows: Financial mobility and its implications have created deflationary
policies almost everywhere in the world except in the U.S., which benefits
from the fact that it is perceived as the world leader and holds the
world's reserve currency. This, in turn, suppresses investment and growth,
and causes investible surpluses to be directed towards the U.S., where
they are used by both public and private sectors to fuel a debt-driven
boom. Financial integration, consequent upon deregulation, has greatly
facilitated the transfer of such savings from poor to rich countries.
Paradoxically, the U.S. economy then emerges as the only engine of growth
and all other countries are obsessed with ensuring increases in net
exports to the U.S. as the means for sustaining their own growth.

It should be apparent that what is critical in all this is the perception
that assets denominated in U.S. dollars remain the safest in today's
volatile and uncertain financial markets. This is fundamentally dependent
upon the rest of the world's notions about the U.S. as the leader of the
world and the dollar as the only available reserve currency. We know from
economic history that neither of these is immutable and that both must
change over time.

However, from the point of view of the U.S., it is obviously important to
keep such perceptions going as long as possible, since they enable the
U.S. to grow almost at the expense of all other economies. There are many
means by which the U.S. tries to keep people of other countries assured of
its supremacy, such as trying to ensure its control over the world's
natural resources such as oil.

But winning the psychological battle about economic superiority - even in
the face of completely contrary evidence - may be just as important. To
that extent, the comments by Greenspan, Bernanke and others may be more
than just the optimistic outpourings of deluded American policymakers.
They may be important inputs into a process of ensuring that confidence in
the U.S. dollar continues, at least for a while, and therefore contributes
to the persistence of even this unbalanced and unequal world order.

From:
http://www.flonnet.com/fl2221/stories/20051021004710500.htm





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